In Case You Missed It: Interesting Items for Corporate Counsel - June 2020

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  1. The Paycheck Protection Program Flexibility Act (PPPFA), here, was signed into law last week. The PPPFA is intended to fix problems with the Paycheck Protection Program (PPP), the keystone of the Coronavirus Aid, Relief, and Economic Security (CARES) Act adopted on March 27, 2020. Our earlier summary of the PPPFA is here.

    The PPP remains a hot mess, and the Small Business Administration (SBA) has its work cut out for it to communicate coherent guidance to borrowers, something it certainly has not done well to date.

    Most commentary on the PPPFA focuses on the extension of the loan forgiveness period – borrowers now may take 24 weeks to spend the PPP loan and potentially have it forgiven – and the reduction of the percentage of the loan that must be spent on payroll costs from 75% to 60%. For our money, the most significant change (potentially, depending on SBA rule-making) is that reductions to forgivable amounts need not be made if a borrower can show “an inability to return to the same level of business activity as such business was operating at prior to February 15, 2020, due to compliance with [federal COVID-19 guidance].”

    In a joint statement published June 8, 2020, here, Treasury Secretary Mnuchin and SBA Administrator Carranza summarize the provisions of the PPPFA and promise that rules, guidance and a modified loan forgiveness application will be issued “promptly.” The SBA’s first new interim final rule, published on June 11, 2020, here, largely makes obvious PPPFA-required conforming amendments to its earlier rules. As we wait for the SBA to tackle more thorny interpretive issues, a few thoughts:

    • The joint statement says that the SBA won’t guarantee loans after June 30, 2020. That position reflects the statement of Congressional intent, here, but contradicts the unambiguous words in the PPPFA. But, well, there you go.
    • The new interim rule makes clear, as predicted, that if a borrower uses less than 60% of the PPP loan for payroll costs, a portion of the loan will still qualify for forgiveness. (The PPPFA language suggested that none of the loan would be forgiven if less than 60% were spent on payroll costs.)
    • The SBA still hasn’t said whether PPP loan proceeds may be spent (albeit not forgiven) after the end of the covered period, which for this purpose is December 31, 2020. This is not as pressing as it was when the covered period ended on June 30, 2020, but it also is not difficult to give guidance. For example: “PPP loan proceeds must not be spent after December 31, 2020; unused proceeds must be retained in a cash account until repaid to the lender.” JUST. TELL. US.
    • The SBA still hasn’t said what “eliminated the reduction” in FTEs and salaries means for purposes of the rehire exceptions to loan forgiveness reductions. Its existing guidance conflates averages over specified periods and numbers at specified points. Providing guidance here also would not be difficult. For example: “For purposes of Section 1106(d)(5)(B)(i), ‘eliminated the reduction’ means that average FTEs in the payroll period that includes December 31, 2020 (or, if the eight-week covered period applies, June 30, 2020) are at least equal to the average FTEs calculated under Section 1106(d)(2)(A)(ii).” This is the most important part of the PPP for many, and the SBA’s failure to provide guidance is abject. JUST. TELL. US.
    • We hope, but are not confident, that the SBA will be generous and clear in its rule-making about the exception to FTE if a borrower can’t return to pre-COVID-19 operating levels due to federal requirements or guidance. (It’s fair to assume for most borrowers that the inability to operate at pre-COVID-19 levels is due to COVID-19. If the SBA loosely ties federal regulation to operating reductions, this exception might swallow the reduction rule. Congress could have cut the Gordian knot of its own unwieldy loan forgiveness provisions by simply eliminating the cutbacks, which would have left a law that simply said: take this loan if it’s necessary, and amounts you spend in a specified period for specified purposes will be forgiven. The SBA isn’t going to go that far, but we hope it takes the opportunity to sever at least several loops in the knot.)
    • Unless an borrower is confident most of its loan will be forgiven, likely the smart play is to delay applying for loan forgiveness at least until SBA guidance is published and possibly until January 1, 2021. At that point, a borrower might better determine whether the eight- or 24-week covered period will result in more loan forgiveness and waiting gives more time to qualify for the rehire exception to forgiveness cutbacks. (There is no deadline by which a borrower must apply for loan forgiveness, and even for those who stick with the eight-week covered period, the rehire deadline is December 31, 2020.)
  2. Wells Fargo was hit with the first PPP-related securities class action, which alleges that (a) the bank improperly prioritized loans to larger small businesses, (b) because of that it was sued, its regulatory and litigation exposure increased, and its stock price sank and (c) therefore its public statements were false and misleading. A discussion is here. Recall that Wells Fargo settled in 2019, for about $320 million, a class action suit for creating fraudulent customer accounts. We think it will fare better in this lawsuit because, and stick with us here, there is nothing at all wrong with a bank prioritizing PPP loans in whatever way it wishes.
  3. The Federal Reserve published on June 8, 2020, here, updated FAQs and term sheets for each of the three types of credit facilities comprising the Main Street Lending Program:


      Borrower size Max. debt after loan
    Main Street New Loan Facility $250,000–$35,000,000 4x 2019 EBITDA
    Main Street Priority Loan Facility $250,000–$50,000,000 6x 2019 EBITDA
    Main Street Expanded Loan Facility $10,000,000–$300,000,000 6x 2019 EBITDA


    The revised term sheets provide for both a lower minimum for two of the facilities and higher maximum for all of the facilities, and, for all of the facilities, extend the term from four to five years and provide for a deferral of any principal payments for the first two years (the interest deferral, which will be capitalized, remains a one-year deferral). Loans must be made through commercial lenders, which then will sell 95% of the loans (up to $600 billion total) to a special purpose entity formed by the Federal Reserve. The program is not yet active.

  4. A host of other COVID-19-related items:
    • Considerations for COVID-19 waivers are here.
    • Going concern qualifications related to COVID-19 are discussed here, here, here and here.
    • The AICPA’s PPP loan forgiveness calculator is available here. (It’s stale, but presumably the AICPA will update it when the SBA publishes the new loan forgiveness application.)
    • Suggestions about how to deal with PPP loans in M&A transactions is here.
    • The SEC adopted temporary relief to Regulation Crowdfunding requirements, here. Summaries are here and here.
    • The SEC’s Division of Enforcement announced it has created a Coronavirus Steering Committee, here, to identify potential market and investor risk, focusing in particular on micro-cap fraud.
    • Several have reported that the SEC is sending letters to public PPP loan recipients in a “sweep” investigation to determine if they were entitled to receive their PPP loans. See, for example, here, here and here. That’s possible, but we are more than a little skeptical of those reports, which, to the extent they cite anything, cite a lone “ThinkAdvisor” article, here, the text of which does not inspire confidence in its accuracy.
    • Intelligize published lessons from early SEC comment letters on COVID-19, here.
  5. Effective June 11, 2020, Washington State will join California in requiring public companies to have a minimum number of female directors or to make board diversity disclosures. The changes to the Washington Business Corporation Act are here, and commentary is here and here.
  6. The SEC adopted, here, amendments to simplify financial disclosures for sales and purchases of businesses. The SEC’s summary of the changes is here, law firm summaries are here, here, here and here, and a handy two-page summary of prospectus requirements is here.
  7. President Trump signed an Executive Order on Preventing Online Censorship, here. The EO reads like a patchwork of tweeted grievances, corrected for spelling and grammar. The substance of the EO risks being obscured by the reason Trump signed it – recent pique that Twitter attached a “misleading” tag to his misleading tweet, and smoldering anger over the belief that “conservative views” are censored on social media platforms. Nonetheless, interesting issues are at play that at least make for good cocktail party chatter. (We imagine, at the kind of cocktail parties we wish we were invited to.)
    • A social media site may be a “public forum” where the government may not unconstitutionally repress free speech. For example, under First Amendment jurisprudence, the government cannot broadly prohibit sex offenders from joining Facebook, which allows minors to join (Packingham v. North Carolina, 137 S. Ct. 1730 (2017)), and a public official who uses a social media account in an official government capacity may not block critical views (Knight Institute v. Trump, 928 F.3d 226 (2d Cir. 2019). But Twitter isn’t the government, and any First Amendment claim directly against it seems doomed to fail. (In contrast, there is a colorable argument that the EO is itself unconstitutional – i.e. the EO is a threat to social media platforms intended to stifle criticism of Trump, and therefore it is a coercive attack on Twitter’s free speech rights.)
    • The EO threatens social media sites with new rules to “clarify” how Section 230(c) of the Communications Decency Act applies. Section 230(c) addressed court rulings that held that if a social media site edits or curates content, it may be a “publisher” of all content on its site and therefore subject to libel and other tort claims. Section 230(c) states that good faith blocking and screening of offensive material does not make the site a publisher. The EO can’t do anything about the law, of course, and presumably its reversal would lead Twitter and others either to ban users that routinely spread false information or label everything they post as potentially misleading. (If they didn’t do that to Trump, for example, many lawsuits would be filed against Twitter related to his posts.)
    • The EO instructs the Attorney General to create a working group to investigate potential enforcement of deceptive trade practices including, in a somewhat Orwellian phrasing, “differential policies allowing for otherwise impermissible behavior by . . . anti-democratic associations.” We suspect this working group will not actually do anything meaningful, but that even it tries it will eventually go the way of the ill-fated Election Commission (see here) – that is, announce that despite finding “substantial evidence” of something, social media platforms were not cooperative and therefore the working group is disbanding.

Key Contributors

James M. Kearney
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